What Is Sustainability Reporting?
What Does Sustainable Mean?
In the world of business, “sustainable” is frequently used to describe the process of conducting business in ways that protect Earth and its inhabitants from irreparable damage caused by human activities. The irreparable damage to the environment has direct economic and social consequences for the present and future generations. Over the last century, people have used much of Earth’s resources with little regard for their use by future generations. As the world population expands (7.3 billion in 2015), meeting the wants (e.g., automobiles, televisions, computers) and needs (e.g., clean air and water, food) of the world’s population is becoming a more difficult problem.1 According to the Global Footprint Network,
Today humanity uses the equivalent of 1.5 planets to provide the resources we use and absorb our waste. This means it now takes the Earth one year and six months to regenerate what we use in a year. Moderate UN scenarios suggest that if current population and consumption trends continue, by the 2030s, we will need the equivalent of two Earths to support us. And of course, we only have one.2
The most commonly cited definition of sustainable addresses the need to consider how we live today and the implications for the future. It comes from the final report by the United Nations World Commission on Environment and Development Conditions. In this report, Our Common Future, the commission coined the following definition: “Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs.”3
By the early 1980s, there was growing evidence of worldwide environmental damage caused by human activity. To investigate the extent of the problem, the Secretary General of the United Nations created the World Commission on Environment and Development in 1983. Gro Harlem Brundtland, the prime minister of Norway (1981–1986), directed the group that became known as the Brundtland Commission. Under her direction, the commission took on the task of researching environmental and economic issues by traveling to all parts of the world and interviewing thousands of people: farmers, industrialists, tribal and indigenous people, government leaders, scientists, and experts. They found a strong international interconnection between ecology and economics. People all over the world expressed considerable concern for damage to the environment and its effects on their lives. In the Brundtland Commission’s final report, it is clear that sustainable development is important to the future fortunes of nations and individuals. The commission concluded that countries and businesses have to be involved in the solutions. They have to work together to address the pressing problems of human population growth and development. Their efforts must be aimed at reducing the effects of human activities on the environment to protect it for future generations.
Scientists around the world have been documenting damage to the environment for over 20 years. To assess the scientific evidence in a systematic fashion, the World Meteorological Organization and the United Nations Environmental Programme created the Intergovernmental Panel on Climate Change (IPCC); its charge was to provide an objective source of information about climate change. The IPCC is a scientific body, and its reports are based on evidence from within the scientific community. Contributions come from experts in all regions of the world and all relevant disciplines. Experts and governments review and approve the committee’s reports, adding credibility to its findings. After 17 years of study, the committee concluded, “Warming of the climate system is unequivocal, as is now evident from observations of increases in global average air and ocean temperatures, widespread melting of snow and ice and rising global average sea level.”4 Rising sea levels are endangering low-lying coastal communities and their economies. The IPCC also forecasted the effects of climate change on specific regions. In the northern latitudes, warmer temperatures will mean less snow and therefore less fresh water from melted snow. The reduction in fresh water will affect agricultural, industrial, and human needs. The damage to and depletion of fresh water supplies have profound consequences for businesses in the present and future.
The undeveloped and developed regions of the world have suffered environmental damage caused by humans. Overexploitation of resources has occurred at all stages of economic development. In undeveloped countries of the world, people living in poverty are using Earth’s resources in unsustainable ways. Trees are cut for cooking fuel but are not replanted. Deforestation of the rain forests to grow crops has exposed thin topsoil to erosion. Once erosion occurs, the land is unusable for growing food or regrowing the rainforest. Many hundreds of acres of rainforest have disappeared and so has the biodiversity that they supported. This is a definite loss for humans because much of the world’s medicines come from plants in the world’s rainforests.
In developed countries, technology that has improved living standards comes at a cost to the environment. The use of fossil fuels to supply energy to factories has been quite damaging to the air, water, and land. The burning of coal releases not only carbon dioxide (CO2) but also dangerous pollutants such as mercury. Mercury that is released from the burning of coal falls on the land and in rivers. Fish in these rivers have become contaminated and unsuitable for human consumption. The disposal of industrial waste through either direct dumping into streams and oceans or agricultural chemical runoff has affected aquatic ecosystems. As freshwater streams and lakes are polluted, the supply of essential fresh water is greatly reduced. When local water is polluted, the cost of acquiring clean water from farther distances becomes prohibitive for the local communities.
The oceans have also suffered from human activity. Overfishing has reduced the wild fish populations substantially. By 2011, approximately 61 percent of the world’s fisheries were fully fished.5 This means these resources are being fished at their maximum sustainable limits. Another 28 percent of the world’s fisheries were overexploited, depleted, or recovering from depletion. In the short or medium term, their production cannot be expanded and more declines are likely. The loss of fish would mean substantial economic losses around the world. Coral reefs have also suffered damage from human activity. The reef fish are dependent on healthy coral to survive, and reef fish provide food and attract tourists to many areas worldwide. Annual revenues from fishing are nearly $240 billion.6 Research has shown that coral reefs also lessen the devastating effects of tsunamis as they come ashore.7
In developed countries, technology has hastened the overexploitation of resources because it allows for a faster extraction of natural resources and higher short-term profits. Too often the externalities (e.g., cost of postconsumer waste, air pollution) are not included in the cost of goods. Without the inclusion of externalities, it may appear that a company is profitable, but in fact the product costs are greatly understated. The economic consequences of environmental degradation are becoming more evident as reports of climate change gain acceptability. Companies, governments, and citizens are becoming increasingly aware of the interconnectedness of environmental, economic, and social issues that confront the planet. It has become evident that the quality of life on Earth is at stake now and will be in the future. Citizens worldwide are responding to the unsustainable business practices by demanding more corrective action from governments and businesses. Many businesses, governments, and citizens’ groups have begun to respond in positive ways.
What Is Corporate Sustainability and Who Cares?
Corporate sustainability is a business approach that creates long-term shareholder value by embracing opportunities and managing risks derived from economic, environmental and social developments.8
—Dow Jones Sustainability Indexes (2015)
The continual improvement of business operations to ensure long-term resources availability through environmental, socially sensitive, and transparent performance as it relates to consumers, business partners, and the community.
—Deloitte (2007)
While corporate sustainability recognizes that corporate growth and profitability are important, it also requires the corporation to pursue societal goals, specifically those relating to sustainable development—environmental protection, social justice and equity, and economic development.9
—Mel Wilson, Senior Manager of Sustainability Practice, PwC (2003)
The definitions of corporate sustainability have in common the long-term focus on an organization’s environmental, economic, and social impacts. Another key aspect is the interactive effect of environmental, economical, and social dimensions. Companies’ actions affect a wide range of individuals, groups, and countries. Because the impacts affect everyday life for people around the world, long-term corporate sustainability is important to the sustainability of the world economy and society.10 The movement to incorporate sustainability into business practices is a response not only to counter the negative environmental effects of industrial and commercial activity but also to evaluate the economic and social effects of industrial and global population growth. The globalization of business operations and occurrences of financial frauds have increased the public’s scrutiny of corporations. The pressure for corporations to reassure the public of their good behavior has increased. As businesses have extended their reach around the world, these organizations are paying attention to their stakeholders as well as their stockholders. Business managers are beginning to see that this approach to conducting business has to become a part of the strategy for their entire company in order to prosper in the future.
Individuals, nations, and businesses are responding to the warning signs that human activities are depleting and damaging many vital natural resources that support human life. There is increased demand for all organizations to be more transparent in how they treat the environment, how they govern themselves, how they treat their employees, and how they treat their communities. Corporate sustainability has become such a major issue that the big four international accounting firms (KPMG, Deloitte, Ernst & Young, and PricewaterhouseCoopers [PwC]) are devoting substantial resources to assist their clients. These accounting firms are becoming key players in sustainability-related services and are undertaking surveys to determine the level and quality of sustainability reporting activity. Examples of their work include the KPMG Survey of Corporate Responsibility Reporting, the Deloitte CFO Survey: Sustainability and the CFO, PwC’s Sustainability CEO Survey, and Ernst & Young’s Six Growing Trends in Corporate Sustainability.
Who Cares?
A stakeholder is anyone that is affected by a company’s economic, environmental, and social activities. Common examples of stakeholders are employees, lenders, investors, customers, suppliers, governments, and communities. The relationship between stakeholders and companies can be a mutually rewarding one.11 Companies depend on their stakeholders to succeed, and stakeholders rely on the companies for something in return. Although each group of stakeholders has a different relationship with the company, their mutually beneficial relationship is a driving force for sustainability.
Companies want motivated and dependable workers who will work ethically, carefully, and honestly. In return, employees expect to be paid fair wages, provided appropriate work tools, and trained to do their work. Employees that are satisfied with working conditions and the ethical conduct of their employer are more likely to work to their full potential. If companies do not provide what workers expect, it will be more difficult to attract and motivate workers to do their best for the business. Even if working conditions are not optimal, many workers stay in their jobs but at a cost to the company. Workers who remain are likely to be less motivated to work in the best interests of the company. They may reciprocate the company’s attitude: “If they don’t care, why should I?” Reduced productivity, reduced work quality, lengthy strikes, and other disruptive labor actions are often the consequences of worker dissatisfaction.
A company’s relationship with its investors and lenders is critical to obtaining affordable funds for operations and expansion. Companies want a long-term, stable relationship with investors and lenders. To build this relationship, companies have to show that they have effective and ethical managers. The company’s governance system needs to be in place and working. In turn, investors and lenders want their investments to be in going concerns with a profitable return. The more transparent a company’s efforts are to achieve good management, ethical behavior, and profitability, the better it is for all parties.
Suppliers and companies that they supply have a symbiotic relationship. They need each other to generate revenues and to stay in business. In order to maintain a vibrant relationship, each must meet the other’s needs. Without safe and good quality products delivered on time and at the desired location, companies cannot satisfy their own customers’ demands. Suppliers need to offer fair prices and appropriate redress for faulty products for companies to return. By the same token, companies need to provide customers with the same commitments—fair prices and appropriate responses to complaints. To maintain a long-term, mutually advantageous relationship, neither a supplier nor a company should abuse their economic power.
Governments and communities are important stakeholders in that they provide companies with the authority to operate. Governments need companies to pay taxes in order to provide services such as fire protection, a police force, and water and sewer management. Adequate fire and police protection reduces risks from physical damage. These services are part of what companies expect in order to conduct business in a safe environment. Adequate water and sewer systems are necessary for health reasons. Governments can provide a stable legal system that provides companies with an orderly approach to conducting business. For communities, companies provide payroll funds that add to the local economy. This includes pay for workers, local suppliers, and contractors. To maintain a good relationship with communities, companies often donate resources (e.g., funds, time, products) to local charitable organizations, schools, and hospitals. Companies also must be good citizens by avoiding pollution of the local environment. If pollution does occur, the company must respond quickly to problems that they create.
A company’s impacts on stakeholders can be positive or negative. The economic dimension of sustainability is how stakeholders are affected in a material, financial way. Wal-Mart, the largest retailer in the world, with 11,000 retail units in 27 countries, provides a good example of the positive economic impacts of a company’s operations.12 Wal-Mart has become such a dominant force in the retailer market that evidence of the company’s impacts is readily available. When Wal-Mart opens a new store in a community, all members of the community become stakeholders. On the positive side, Wal-Mart’s strategy of price leadership continues to be a successful strategy for its customers and investors. For consumers seeking low-priced goods, the company provides a low-cost option for their customers. For stockholders seeking a growth stock, Wal-Mart’s performance in growth and profit has been quite good in recent years. In the company’s fiscal year, which ended January 31, 2014, net sales totaled $473 billion, a $7.5 billion increase over 2013 sales.13 The financial impact on stockholders was an earnings per share of $4.85 for fiscal year 2014. In February 2015, the company announced its 41st consecutive annual dividend increase to $1.92 a share.14 The company planned to open 385 to 425 new retail units in 2015.15 The construction and opening of new stores creates jobs. Wal-Mart employs approximately 2.2 million people worldwide.16 This statistic alone illustrates that the company’s total payroll has a significant economic impact worldwide.
Negative economic impacts can be seen when companies monopolize an industry by unfairly driving out competitors and illegally fixing prices within the industry. These impacts are detrimental because they result in lost financial opportunities for those who have had to pay too much for a product or service. When U.S. industrialization began to accelerate after the American Civil War, many industrialists (e.g., Cornelius Vanderbilt, Andrew Carnegie, John D. Rockefeller, J. P. Morgan) of the time in the railroad, steel, oil, and communications industries established monopolies. The industrialists acquired and suppressed their competitors often by engaging in unfair business practices. Without strong competitors or antitrust laws, they could control various markets essential to the entire economy. A good example is the monopolistic activities of Standard Oil Trust in the late 1800s. In 1882, John D. Rockefeller established the Standard Oil Trust, which controlled more than 90 percent of the oil-refining capacity and most of the oil-marketing facilities in the United States. In an attempt to reduce the power of monopolistic companies, the U.S. Congress countered these monopolies with antitrust legislation. The Sherman Antitrust Act (1890) was enacted to limit monopolies, and the Clayton Act (1911) allowed individuals to sue companies for injuries to business or property from actions covered under the antitrust laws. In 1909, the federal government filed suit against Standard Oil under the Sherman Antitrust Act for sustaining a monopoly and interfering with interstate commerce. The company was accused of raising prices for its customers in markets without competition and lowering prices below cost to suppress existing competitors. In addition, the company was charged with obtaining illegal rate reductions from the railroad industry. In 1911, the U.S. Supreme Court ordered Standard Oil to be split into 34 separate companies with different boards of directors.
Negative economic impacts of companies that harm fair competition continue to be a problem. Since the enactment of the Sherman Antitrust Act in 1911, the U.S. Department of Justice (DOJ) has prosecuted companies that engage in monopolistic behavior such as illegal price fixing and other activities that exclude competitors through illegal means. The DOJ’s mission for the last six decades has been “to promote and protect the competitive process—and the American economy—through the enforcement of the antitrust laws.”17 Between 2001 and 2009, the Antitrust Division of the DOJ collected more than $3.5 billion in criminal fines from more than 120 corporations and 160 individuals in their criminal antitrust prosecutions.18 Among the corporations prosecuted during this period was Samsung Electronics, a manufacturer of dynamic random access memory (DRAM). Samsung and its U.S. subsidiary pleaded guilty and were sentenced to pay $300 million in fines for their involvement in an international DRAM price-fixing conspiracy in 2005. Between 2009 and 2015, over $4.9 billion in criminal fines were collected in the 365 criminal cases filed.19 Among these cases was the London Inter Bank Offered Rate investigation. A conviction against Rabobank resulted in a collection of $325 million in fines for manipulating interest rates.
The social dimension of sustainability is about companies’ social impacts on employees and communities. Workers are at the core of an organization, and how it treats its workers with regard to compensation, safety, and training has direct effects on their well-being. The positive side to this dimension involves organizations providing fair wages, safe work environments (e.g., protective gear, adequate ventilation), and appropriate job training. The positive impacts on the community would be where the organization contributes workers’ time, money, or products to support the needs of the community. To illustrate, Baxter International Inc., manufacturer of medical equipment, pharmaceuticals, and biotechnology, donated $34.29 million in products along with $27.9 million in cash in 2013 to communities around the world.20 Baxter also responds to victims in need after natural disasters such as earthquakes by donating medicines and supplies.
Some negative social impacts would be a disregard for the well-being of workers. For example, violation of workers’ rights has been a consistent legal issue for Wal-Mart. In December 2008, Wal-Mart settled 63 wage-and-hour lawsuits in federal and state jurisdictions in 42 states and agreed to pay between $352 and $640 million to workers for a variety of illegal tactics.21 These tactics included erasing workers’ time from time cards, forcing employees to work off the clock without pay, and denying workers lunch and other breaks that were guaranteed by state laws or promised by the company. In December 2014, the National Labor Relations Board ruled that California Wal-Mart managers disciplined illegally employees for striking and threatened unlawfully a store closure if employees joined together to seek higher pay.22 By violating workers’ rights over the years, it has cost Wal-Mart in dollars and negative publicity.
Another direct social impact on employees and communities has been Wal-Mart’s approach to employee health care benefits. The company had required their full-time workers to wait six months to be eligible for health care benefits and part-time workers to wait two years. Workers were responsible for 33 percent of the premiums, which ranged from $30 a month for an individual to $230 for a family. If workers were eligible for health care insurance coverage, their premiums were expensive relative to their wages. There are several examples of the social consequences of Wal-Mart’s health care policy that demonstrate the social impact on not only the company’s workers but also the surrounding communities. In Georgia, officials discovered that in the state’s health program for children, taxpayers were funding close to $10 million annually for more than 10,000 children of Wal-Mart’s employees.23 In another state, a North Carolina hospital found that of 1,900 patients self-described as Wal-Mart employees, 16 percent had no insurance at all and 31 percent were on Medicaid. Taxpayers in California were funding the health care costs of uninsured Wal-Mart workers in the annual amount of $32 million.24 In response to growing criticism, the company changed its health care policy. Full-time employees waited 6 months to become eligible for health care coverage, and part-time workers waited 1 year.25 Benefits for part-time workers did not last. By 2014, citing its efforts to cut rising health care expenses, Wal-Mart eliminated health care insurance coverage for 30,000 of its part-time employees.26
Consistent reports of Wal-Mart’s mistreatment of workers have taken their toll. One consequence is that labor unions have supported boycotts of its stores: “The criticism stung, but more important, it began to affect the bottom line. Between 2000 and late 2005, Wal-Mart’s stock fell 27 percent.”27 The lawsuits and negative news stories have been costly in financial and public relations terms. The legal expenses are the most obvious financial cost. In addition, Wal-Mart has engaged in an expensive public relations campaign to repair its reputation and counter the public image that the company mistreats its workers. These negative social impacts are connected directly to the financial impact.
The environmental dimension of sustainability is the third component of sustainability. Stakeholders that are affected by the environmental impacts of a company include consumers, suppliers, neighbors, and government agencies. Wal-Mart stores affect the environment in many ways. Because of its size, Wal-Mart’s operations have profound positive and negative effects on the environment. When Wal-Mart decides to engage in proenvironmental behavior that reduces the company’s costs, the decisions have dramatic positive environmental effects all over the world. Wal-Mart installed compact fluorescent light bulbs (CFLs) in ceiling fan displays in their stores to reduce their energy costs and promote the sale of CFLs to the public. The CFLs consume 75 percent less energy than a traditional incandescent bulb and last from five to seven years. The energy cost savings to Wal-Mart is $7 million a year. In 2005, the company set a goal of selling 100 million CFLs by the end of 2007. This goal was met by the middle of 2007, and by the end of 2008, the total sales of CFLs had reached over 137 million. In addition, Wal-Mart claimed that the use of the over 137 million bulbs would prevent the release of 25 million tons of carbon dioxide or the equivalent of removing 1 million cars from the road.28 In 2014, the company announced plans to install LED ceiling lighting fixtures for new supercenter stores in the United States, stores in Asia and Latin America, and in Asda stores (a U.K. subsidiary of Wal-Mart).29 Over 10 years, these fixtures are estimated to save 620 million kWh. To complement this energy efficiency, the company’s goal is to have 100 percent of its energy for its buildings supplied by renewable sources. Wal-Mart is investing in its own solar and wind projects along with contracts from renewable energy providers that supply power purchase agreements. The company buys renewable sourced energy at a fixed rate over a 10 to 15 year contract. By 2014, renewable energy constituted 24 percent of its energy source.30 Wal-Mart expects that because of its size it will be a driving force in increasing the supply of renewable energy.
Another way that Wal-Mart saves costs is from the efficient use of energy in its semitrailer trucks. The company installed auxiliary-power systems in its fleet so that drivers can shut off their engines and still run their air conditioners to cool the products.31 Wal-Mart saves $25 million in energy costs every year along with a 100,000-ton-a-year reduction in greenhouse gases (GHGs) from these trucks. The company estimates this reduction to be the equivalent of taking 20,000 cars off the roads. Suppliers are also affected by a company’s environmental decisions and actions. For example, in 2009 Wal-Mart launched The Sustainability Index in a collaborative effort with The Sustainability Consortium. The Sustainability Index provides a tool to track the sustainability of products all along the supply chain. As part of its efforts to reduce GHG emissions in its supply chain, Wal-Mart in partnership with the Environmental Defense Fund used the Sustainability Index to get cooperation from it supply chain and eliminated 7.575 million metric tons of GHG by the end of 2013.32
On the negative side, Wal-Mart’s practices across the country have been in violation of federal and state environmental acts. In May 2013, Wal-Mart agreed to pay nearly $82 million in fines for improperly dumping hazardous waste in California and Missouri.33 Beginning in 2003, California Wal-Mart workers had thrown bleach and fertilizer into the garbage or local sewer systems instead of treating them as hazardous waste materials. In Missouri, damaged returned goods such as pesticides were mixed with other products and prepared for resale without required proper registration or labeling. In the end, Wal-Mart pleaded guilty to charges for six counts of violating the Clean Water Act in California and one count of violating a federal law against pesticide disposal in Missouri. Although the individual fines may not have a material financial impact on the company, the repeated negative publicity damages its reputation.
What Is Corporate Sustainability Accounting and Reporting?
Sustainability accounting refers to information management and accounting methods that are designed to make and provide high-quality information to assist an organization in becoming sustainable.34 Sustainability accounting systems provide mangers with relevant information to strive toward sustainable development. Sustainability reporting provides users with economic, social and environmental impacts to help manage change toward sustainable development.35 Any type of organization—profit, government, nonprofit—regardless of its product (a tangible product or a service) can measure and report its impacts. Government agencies, service, and nonprofit organizations have impacts on the environment through their use of paper, energy, and transportation. Sustainability accounting information is useful for both external and internal users. For external users, sustainability reports provide a more transparent view of a company’s environmental, economic, and social impacts. Stakeholders can gauge companies’ sustainable activity in a specific period and over time. If a sustainability report provides information about a company’s annual emission of GHGs, stakeholders can evaluate these reports to assess the company’s progress toward lowering emissions. For internal users, sustainability reports assist the company in identifying and managing the full range of corporate sustainability impacts from processes, products, services, and activities.36
The environmental dimension encompasses the reporting of an organization’s material impacts on the air, water, and land. For a manufacturing firm, the assessment of impacts should include the entire life cycle of the product from development to final disposition. In the product development stage, design decisions concerning the choice of raw materials and production processes can save costs and reduce a firm’s environmental risks. For example, Interface Inc., an international carpet and upholstery manufacturer, designs carpet tiles that use compostable raw materials. Interface Inc.’s concern for the environment covers not only the raw materials but also the installation and disposition of the carpet tiles. The company developed a line of carpet tiles called Tac Tiles that would adhere without glue. The carpet system is designed so that the tiles adhere together rather than to the subfloor. The system floats above the floor; adhesives with volatile organic compounds have been eliminated. Interface Inc.’s cost savings occur with raw materials and the reduced risk of environmental damage. Another advantage of carpet tiles is that they allow for easy replacement of only worn tiles rather than the entire carpet in a room. By reporting the type and quantity of raw materials purchased, GHG emitted, water used, and solid wastes generated, organizations can measure and exert control over the negative impacts they may cause during the design and production of their products. These evaluations can help organizations choose potentially less costly alternatives that pollute the environment. Raw materials with toxic ingredients carry the risks of spills and improper discharges into the environment. These spills are dangerous for people and natural resources in the surrounding communities. In addition to the physical danger and damage, legal fines for spills and the resulting cleanup are costly. These costs and liabilities can affect a company’s profits.
In the social dimension of sustainability reporting, an organization reports its impacts on its employees (human rights and labor practices), consumers (product responsibility), and society in general (community contributions). Nike is famous for its sports equipment and apparel and for its use of contractors that employed children in the 1990s. After the revelation that child labor was used to manufacture its products, Nike faced a public relations nightmare. Since that time, the company has made it a mission to eliminate the use of child labor and to monitor its suppliers’ factories. After many years of public criticism, Nike became the first business to disclose the names and locations of its entire supply chain, including the names and locations of more than 700 factories that produce its products. This disclosure was included in the company’s corporate responsibility report.37
In the economic dimension of sustainability reporting, an organization reports its material financial impacts on communities, employees, governments, charities, and others directly affected by its operations. HP, producer of computer hardware and software products, is a case in point as it reported in its 2014 Living Progress Report net revenues of $111.5 billion, which 65 percent comes from outside the U.S. borders.38 HP’s workforce consists of 302,000 employees across the world. It also disclosed where its economic impacts from purchasing affect its value chain by revealing the amounts spent with its U.S. suppliers categorized by small, minority-owned, women-owned, and veteran-owned businesses.
History of Reporting
Since the 1960s, investors have been demanding more than financial information to make investment decisions. Sustainability reporting is part of a long history of investors’ investment strategies that include evaluation of both nonfinancial and financial performance. Socially responsible investing is an example of nonfinancial information being used to determine the desirability of particular investments. As a protest against the Vietnam War in the 1960s, many investors rejected funding weapons-manufacturing firms. In addition to rejecting profits from weapons, many people sought to avoid companies that produced or promoted physically or psychologically harmful products and services such as tobacco, alcohol, and gambling.
During the last half of the 20th century, the detrimental effects of environmental pollution motivated many people to take action against those responsible. Evidence of the dangers of air and water pollution was becoming widely available. The visible smog in large cities was due to the increase in automotive traffic and industrial activity. Industrial air pollution from manufacturing processes and the burning of coal increased as businesses expanded. In October 1948, an air pollution disaster killed 12 people and sickened thousands of people and animals in Donora and Webster, Pennsylvania. Smoke from burning coal and emissions (sulfur oxide, carbon monoxide, and particulates) from a zinc smelter and steel mill were trapped in a valley in southwest Pennsylvania. A temperature inversion caused the polluted air to stay over this area for five days. Fifty more people died in the month following the disaster; many survivors were ill for years and died premature deaths.39 Reaction to this disaster resulted in the enactment of air pollution legislation in the 1960s and 1970s. Rachel Carson’s book Silent Spring, published in 1962, brought to public view that the pesticides being used all over the United States had not been evaluated for human and animal safety. Her book and testimony before Congress were instrumental in the establishment of the U.S. Environmental Protection Agency in 1970. Evidence of the dangers of air and water pollution was becoming widely available. In 1969, the Cuyahoga River in Cleveland, Ohio, caught fire from an oil slick and debris that had collected in a bend of the river.40 The fire lasted only 30 minutes, but pictures of the fire with a huge column of black smoke were dramatic and widely distributed. Because fire on a river is an unexpected sight, publicized images had a powerful impact. The images of the fire became a symbol of water pollution problems in the United States. In fact, the fire in 1969 on the Cuyahoga was only one among many on the river over a century. There had been river fires in other industrial states such as New York, Michigan, and Maryland. Publicity of industrial pollution and public awareness of growing pollution of air, land, and water played a role in the passing of the federal environmental laws in the 1970s. These laws changed how lawsuits against companies could be initiated by greatly expanding the enforcement powers of federal government and the public. Some of the statutes encouraged suits from citizens and enabled attorneys to recover their fees from the federal government.41 In the 1980s, companies that had caused major environmental disasters were motivated to produce environmental reports to counter negative publicity.
By the 1990s, the globalization of business entities drew attention to the impacts that large corporations had around the world. News reports of poor working conditions, the use of child labor, and corruption had many companies on the defensive. To counter the public’s negative perceptions of big business, many large companies began to engage with their stakeholders and to issue corporate responsibility reports. More sustainability reports surfaced because companies began to see the benefits of engaging with their stakeholders. For most companies, their reputation is considered a resource that takes many years to build and a short time to lose. It was better to be proactive with stakeholders rather than risk having to react to bad publicity.
Many companies have incorporated sustainable development into their strategy because top management believes that it is the right thing to do. Interface Inc. is a prime example. Ray Anderson, the company’s founder, recalls that his company did not pay serious attention to its use of Earth’s resources or the damage being inflicted by the company’s production processes in its first 21 years in business.42 The carpet industry was heavily dependent on petroleum for its raw materials, which were not environmentally friendly in terms of production or postconsumer disposal. The company’s approach was to obey necessary laws and regulations and stay focused on growing the business. Anderson was personally inspired when he read The Ecology of Commerce by Paul Hawkins. In 1994, Anderson changed the company’s business model from one that only took from the earth to one that is restorative. Anderson realized that his company’s successful transformation could inspire and influence others, so in 1998, he published an account of his epiphany in his book Mid-Course Correction.43 Even in retirement, he continued to give speeches worldwide and write other books about the urgent need for businesses to become sustainable. He had made achieving sustainability not only his company’s mission but also a personal one to teach others about its urgency.
Companies have discovered that publicizing their positive social and environmental behavior has financial rewards. They can better manage their costs and attract attention to their positive behavior. As more investors learn about the positive results of sustainable development, they are eager to reward companies for protecting the environment, human rights, and animal rights. Many companies realize that working within environmental laws and going beyond compliance were more cost effective than not. These benefits are more than anecdotal. In 2014, a systematic examination of 190 academic research studies showed that companies with active sustainability business practices had better economic results; this was true for both operational and investment performance.44